Oil Glut Likely as Pipelines Open

The production of high-quality U.S. oil is rising and reaching levels not seen in nearly a generation, but the nation's refineries are not prepared to process it into gasoline, creating a potential glut.

A half dozen U.S. oil pipelines coming on line in the next 18 months will deliver about two million barrels of light sweet crude oil — the most sought-after version of crude — each day from the Midwest to the Gulf Coast, where most refineries are located, The Wall Street Journal reports.

Light sweet crude oil can most easily be turned into gasoline, but U.S. refineries are set up to process the heavier "sour" oils that have constituted the bulk of U.S. imports for the last 20 to 30 years. Sour crude contains higher levels of sulfur.

To process the oil, gas producers will need to build new refineries, or upgrade existing refineries to meet the increase in supply.

"It's rare to find a refinery down there that can take the majority of its crude" from the U.S. supply of light sweet oil, Cowen Securities analyst Sam Margolin told the Journal.

The first of seven pipelines — Magellan Midstream Partners' Longhorn — began sending oil from West Texas to Houston in April. The pipelines will deliver crude from the "oil-saturated choke points in Oklahoma and the interior of Texas to the largest concentration of refineries in the country," the Journal says.

U.S. oil production is at its highest level in 17 years, thanks largely to the increase in hydraulic fracturing. Analysts say that it is on pace to reach peaks not seen in more than a quarter century.

The production of high-quality U.S. oil is rising and reaching levels not seen in nearly a generation, but the nation's refineries are not prepared to process it into gasoline, creating a potential glut.